Exam 13: Policy Effects and Costs Shocks in the Asad Model

Explain how external shocks might casue cost-push inflation.

Explain how changes in the exchange rate might casue cost-push inflation.

If the United States were to pass legislation that would make it easier for people to emigrate to the United States what impact would this have on the economy? Use the AS/AD model to explain your answer.

Explain why the aggregate supply curve is flat in the short run and steep in the long run.

Explain what a cost shock or supply shock is.

Why might the general public in a country suffering from hyperinflation choose to purchase cars they don't need, art and precious metals instead of depositing their money in banks where at least they will earn interest?

What might keep the aggregate supply curve from becoming completely vertical?

Explain why increases in long-run aggregate supply are the only means to achieve sustained increases in aggregate output.

According to economists who believe the aggregate supply is vertical in the long run, what is the adjustment process in the economy if output is below full employment?

In 1993 there was a severe drought in Maldavia. As a result of the drought, approximately two-thirds of the country's agricultural crops were destroyed. Using an AS/AD diagram, indicate what effect this drought would have on the overall price level and the equilibrium level of output. The Maldavian government is considering a number of policies to counter the effects of the drought on the economy. For each of the following policies, draw a graph that indicates the effects of the drought and then indicate how the policy would affect the overall price level and level of equilibrium aggregate output in Maldavia. (a) The government is considering reducing net taxes. (b) The monetary authority in Maldavia is considering a one-time increase in the money supply. (c) The government is considering reducing public investment in agriculture and not spending that money on any other projects.

Assume there are two goods in an economy: bread and bottled water. Assume bread sells for $2 per loaf and water sells for $1 per gallon the first year and in the second year the price of a loaf rises to $2.50 and bottled water rises to $1.25. Why is averaging these two prices meaningless in terms of trying to figure out whether or not there is inflation in the economy?

Define stagflation.

Suppose minimum wages are tied to the consumer price index.How might this contribute to cost-push inflation?

Discuss how public policy during the 1980s was aimed at shifting aggregate supply.

-Using the above graph, if the economy is initially at point B how would you describe a change which resulted in an increase in aggregate supply?

Explain why the aggregate supply curve is likely to be fairly flat at low levels of aggregate output.

Assume the Federal Reserve Bank chairman implores business people not to raise prices as a means of controlling inflation. Why is this likely not to work?

Assuming that the Fed takes no action to change the money supply, as the price level increases, what chain of events will occur?

Draw the short-run aggregate supply and long-run aggregate supply curve on the same graph along with the aggregate demand curve. Illustrate the effects of an increase in aggregate demand on both the price level and the output level both in the short-run and the long-run.

Explain why the aggregate supply curve is not a market supply curve.